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Do Regulations Kill Innovation?

There is a common theory that regulations stop innovation, but is that actually the case?

4Jul

There is a generally held belief that ‘red tape’ and regulation kills innovation, steals people’s jobs and is generally incredibly negative. There is some method to this if you think about it in a very simplistic way. It is certainly true that if you prevent an industry growing then it will likely mean that people either lose their existing jobs or don’t gain new ones. However, this is not necessarily the case, as we have seen several companies who have created innovative products and services because of new regulations. For instance, many renewable energy companies have profited from new environmental regulations imposed by governments around the world.

So do regulations help or hinder innovation?

There is an interesting theory that rather than either promoting or restricting innovation, the actual existence of regulations, especially in manufacturing and factories, is a sign that there has been a historical flaw in an innovative idea. According to William McDonough & Michael Braungart in their book Cradle-to-Cradle. Remaking the Way We Make Things, ’In a world where designs are unintelligent and destructive, regulations can reduce immediate deleterious effects. But ultimately a regulation is a signal of design failure. In fact, it is what we call a license to harm: a permit issued by a government to an industry so that it may dispense sickness, destruction, and death at an “acceptable” rate.’

When you take this thinking and bring it to other industries beyond damaging manufacturing it also makes sense. For instance, when you think of the regulations that Uber are consistently ‘in breach’ of in many cities, they are inherently protectionist. For instance, Uber are currently facing lawsuits in the EU for them to be regulated in the same manner as regular transport companies, but in a statement referencing the case, an Uber spokesperson claimed ‘Being considered a transportation company would not change the way we are regulated in most EU countries as that is already the situation today… It will, however, undermine the much needed reform of outdated laws which prevent millions of Europeans from accessing a reliable ride at the tap of a button.’ When you see it in this way it is clear that rather than regulations being used to deliver a better, safer product, there is an attempt to simply use them to protect the existing taxi industry because they are being disrupted by a product that offers a considerably better product for modern customers.

Many modern innovations are therefore being created to get around what seem like protectionist and inhibiting regulations. AirBnB, for instance, has faced a number of calls for further regulation because they are disrupting traditional hotel and short-term rental. This does nothing to improve the product being disrupted and simply acts to protect the flaws in the products being disrupted.

Pivoting to adjust to new challenges is at the core of innovation, so to claim that regulation is somehow impacting the ease of innovation is not universally true. In many cases, like the recently repealed Clean Water Act, if this act was stopping innovation, it’s the kind of innovation that would allow companies to do huge environmental damage something they would want to achieve anyway? If so then its not innovation, it is simply moving backwards towards an unsustainable system that is destroying the very thing needed for it to thrive.

Often these kinds of regulation are therefore the cause of innovation, because when faced with an option of changing from a profitable and familiar system, the majority of companies will choose to stay the same. For instance, in September 2014 the EU launched a directive that limited the power of domestic appliances so that they used less electricity and therefore made them more ecologically friendly. It forced many companies to rethink the technologies they had previously been using in products like Vacuum cleaners, which ultimately meant that they created better, more energy efficient products. If this regulation had not existed the chances of real meaningful innovation would be reduced to fitting more powerful motors. Similarly in the US, the EPA under President Obama put regulations in that stipulated that automobile manufacturers must make sure all cars produced have a fleet wide efficiency of more than 50 miles per gallon by 2025. Rather than hindering innovation, it is going to force companies to rethink how they produce cars which will ultimately benefit the consumer.

That isn’t to say that there aren’t regulations that are hindering innovation though, there are several examples where regulations - many of which are protectionist in nature - are severely limiting innovation. Electronic cigarettes are a prime example, where similar regulations are being put on them as regular cigarettes. For instance, in the UK regulations put into place means that all e-liquid bottles can only be 10ml and have a limited amount of nicotine. Given that the overwhelming majority of evidence suggests that it’s safer than regular smoking and its aim is to stop people smoking, it seems like unnecessary and does genuinely limit how a new and positive industry grows.

The questions of whether regulations help or hinder innovation is perhaps impossible to answer given the huge variety of regulations across the world. Some regulations will certainly negatively impact it, but others will force companies to make superior products. Perhaps looking at it in that way - what the ultimate purpose of a regulation is - then that would be the best way to approach the question. If it aims to protect something that has been shown to be ineffective, then perhaps it is restrictive, if it aims to improve what’s already there, then it may ultimately promote it. 

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